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Who is Korea Development Bank?

By Dealbook August 22, 2008 12:34 pmAugust 22, 2008 12:34 pm

Lehman Brothers shares saw a big pop on Friday, as investors seized on a report that the government-owned Korea Development Bank might consider acquiring the firm, among other strategic options. Many analysts said such a move seemed far-fetched, but the Reuters story ignited a firestorm of speculation.

Over the past 12 months, other major Korean investment funds — like the Korean Investment Corporation — have grabbed headlines. But what exactly is K.D.B.?

Founded in 1954 as the Korea Reconstruction Bank, K.D.B. was created by the South Korean government to help finance that country’s economic development in the wake of the Korean War. As of 2007, K.D.B. claimed to have assets of 122.6 trillion won ($115 billion) and total equity of 18.6 trillion won ($17.5 billion).

K.D.B.’s current governor, Euoo Sung Min, is no stranger to Lehman: He led the firm’s Korean operations until June.

Since its inception, K.D.B. has slowly assumed more financial businesses, including foreign exchange. By the 1980s, it had become one of the biggest backers of the nascent Korean auto-maker and electronics industries, helping to pull in foreign investments.

While it is currently wholly owned by the Korean government, K.D.B. said earlier this year that it plans to become a privately owned company by 2011. The Korean government has outlined a complex plan to spin off K.D.B., including the formation of the Korea Development Fund, a new investment vehicle that will assume K.D.B.’s old role.

“K.D.B.’s successful development into a global investment bank will prompt the transformation of the Korean financial industry, leading to the discovery of new sources of export and growth engines for the economy,” Korea’s Financial Services Commission said in a report (PDF) issued earlier this year.

In this decade, K.D.B. completed its diversification into all major aspects of a modern-day securities firm, including investment banking, corporate banking and corporate restructuring. As Daewoo Motor‘s lead creditor, K.D.B. spearheaded the car maker’s sale to General Motors in 2002. K.D.B. was also the lead creditor in other Korean corporate bankruptcies, including that of LG Card, a former unit of the giant electronics maker, LG Group.

The bank has had its share of troubles, however. Several officials over the years have been implicated in bribery scandals, including those involving Hyundai Motor and the collapse of Hanbo Steel.

Many observers said that despite its financial firepower, K.D.B. isn’t likely to acquire Lehman outright.

Rupert Della-Porta, the London-based chief operating officer of research firm Atlantic Equities, said a full takeover by the state-owned lender is unlikely.

“It would be too big an acquisition for them,” he told Bloomberg News, adding that Lehman chief Richard S. Fuld Jr. “has made it very clear that he doesn’t want to sell the operation. They have many other options before they would consider something like this one.”

“I would be very surprised by any deal that would lead to complete control,” Stuart Eizenstat, a former deputy Treasury secretary who is now a partner at Covington & Burling, told Bloomberg. “That would elicit a lot of questions and political blowback. I’m sure that’s not going to happen.”

As a buyer, K.D.B. has done few high-priced deals in the last decade or so — and virtually no deals in the United States, according to data from Dealogic.

Its largest acquisitions since 1995 include an investment of about $500 million in Kepco, a domestic electric utility, in 2005. Earlier this year, K.D.B.’s private equity arm took part in a $690 million takeover of auto-parts maker Mando.

When that latter deal was announced, the Korea Times expressed surprise, writing that “it is rare for the K.D.B. to invest such a large amount of money in a firm.”

As of Friday at midday, Lehman’s market cap stood at about $10 billion.

Korea Development Bank by most observers familiar with the firm is stretching to consider the acquisition of Lehman Bros. Why?

I can only speculate that they see value where everyone else doesn’t. With the capital markets in complete turmoil and asset valuations falling almost every month – – The acquisition may be considered an act of faith by some.

I pity the financial modeler who will be pricing the assets and business prospects. Mark to market bad but if you project out far enough, I suppose any story can be made to look like a winner. Look at Time Warner’s acquisition of a blue chip company – AOL.

Time will finish the story – –
Meanwhile, to all you money rich funds sitting with idle capital burning a hole in your pocket, “Come on over and kick the tires”, we got lot’s of Lehman Bros type opportunities for you to choose from.